On a recent business flight out of Atlanta, I was offered the opportunity to give up my seat in exchange for a slightly later flight … in first class. I accepted because it meant my seat would keep a young family together on their way to Disney World … though first class wasn’t a bad perk either.

What I didn’t know is that I would be sitting next to someone who is a respected authority on flipping houses. This woman is a nationally known expert and has appeared on numerous television shows for the past several years. I asked her if she was who I thought she was and lo and behold, she was! After explaining that I had a personal finance blog and inquiring if I might ask her a few questions about flipping houses, she agreed … so long as I didn’t use her name. “It would just make things complicated if I were to give interviews without running it by my agent and attorney.” I agreed to her conditions – so don’t ask who she was!

I was in for a surprise.

She had more information than I was ready to absorb.

Me: What’s your number one best tip for flipping a house?

Expert: Be there. Be on site. Absentee management doesn’t work and it never has despite how the shows are edited. Sure it would be nice to put something on auto-pilot and show up only to land the plane (no pun intended), but to flip a house successfully, YOU must be on the job site every single day to monitor the work being done … and push it to get done. Otherwise, you’re getting ripped off. Bank on it.

Me: I know the economic environment has had a deep impact on the real estate industry. What can house flippers learn from it?

Expert: To successfully flip a home, you have to know what features buyers are looking for. You may like zebra stripped carpet but only a tiny fraction of all buyers will share your tastes. Talk to a real estate agent about what you are planning to do to the property. Determine what the property will sell for after your repairs and improvements are completed. Also, don’t be afraid to make low offers. A “no” this morning doesn’t mean “no” this afternoon. Don’t let fear stop you.

Me: Since I run a personal finance blog, do you have any advice on the financial end of things?

Expert: Haha! Are you kidding? Everything to do with a flip is financial!

Just always remember that time is money  … to make the money you want to make you have to buy it, fixit and flip it fast. Use both your time and money wisely and you’ll be successful. Too many amateur flippers have no idea how long it takes to complete most home repairs and they lose track of how many weeks or months they’ve been tied up on a project.

Budget the most on your kitchens and bathrooms. Those are where you should put the bulk of your money, probably 40 to 60 percent. And don’t forget about landscaping – plan to spend about 10 percent of your budget on landscaping and curb appeal. This area is always the last to get finished and that’s a HUGE mistake. Curb appeal draws people into the home and you don’t want to turn people off before they get out of their car because you cheaper out on the front yard. I’ve seen many houses with great landscaping sell while others with similar interior specs just sit on the market for weeks or months. It’s amazing what sod can do for the front of a home. Don’t neglect landscaping!

Put your budget on paper. I personally prefer using old fashioned pencil and paper rather than a computer because there’s just something about writing it down that makes it real. Compare your actual costs to your budgeted costs so you can see where the differences occur … and there WILL be differences. The key is to have a budget meeting with yourself every couple of days so if you go over budget in one area, you’ll know you have have to make adjustments somewhere else. Just know that when you go over early, those adjustments are much more difficult to make later on … and landscaping always seems to take the hit.

Understand all the costs involved in the transaction. These costs could include interest, repairs, upgrades, closing costs, home inspections, holding costs and sales commissions for the realtors. Most of the time on the show, we don’t show all these costs and it’s a bone of contention between me and the producers. When a couple buys a home for $575,000, puts $42,000 in it and plans to sell it in 6 weeks for $699,000 we rarely mention the realtor’s commissions, mortgage closing costs, or inspections.

Don’t invest everything you have. Always, always, always have extra money in reserve. If you plan to use every penny that you have, you will be in trouble. And have your funding in place before you look for a deal. Remember that you’re in business and no business would ever start without having some cash on hand and knowing where to get more.

And always remember that you make your money only if you buy it right in the first place. If the seller won’t sell at the price you need to make your desired profit, walk away. Trust me, you’ll be walking away from a lot of deals but that’s okay. It’s better to miss a few good deals than to make one bad one, especially early in your flipping career.

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Me: I’ve noticed on the shows that almost NO ONE stays on track with their time line. What gives?

Expert: People we feature on these shows don’t know what they’re doing. It really is that simple. We pick a lot of them because of that fact – it makes for better television to see someone blow it. People can relate to that. Fewer people can actually relate to success. To succeed as a flipper, you’ll have to have a timeline with some allowances for no-show contractors and unexpected delays with everything from building inspectors to weather but it’s up to YOU to keep everything on schedule.

Sometimes the problems are unavoidable - a problem may appear just hours before the transfer of ownership. You will almost always run at least a little over budget and have to find some more cash or you may hold the flip a little longer than expected.

The BIG mistake is being too aggressive on the front end and expecting to do a $100,000 renovation in 5 days. You aren’t working for Extreme Makeover Home Edition.

Me: I’ve also noticed that a lot of the flippers on the show seem emotionally attached to the property.

Expert: You’re right, they do get emotionally attached but that’s because most of them are amateurs, like I mentioned earlier. The only homes they’ve bought in the past were for their personal use and each one of their former purchases of a home was for highly personal reasons. But make no mistake: flipping houses is a business and if you want to stay in business, you have to let go of the emotional attachment to that house and make money. Unless you’re planning to rent the place, selling it is the only way to make anything from it.

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Me: What about hiring contractors? Any tips here?

Expert: Investing in real estate is a team sport regardless of how it’s portrayed on television and like other team sports, the stronger your team, the better your chances for success. Your team should be made up of reliable, and reputable contractors, local building officials, a real estate agent, and a staging company. Since you obviously can’t be on site 100% of the time, your contractor and his or her subs will be a crucial element to your making money. And please don’t try to sell your flip yourself – you’ll only delay the sale. That doesn’t mean you can’t negotiate a great deal with an agent though!

One thing to always remember: check your contractor’s references and check a LOT of them. Even bad contractors have a few good references but rarely more than three. I recommend checking at least five references and if you can check more, do it. Also, call the licensing board in your state to check the contractor’s license. Make sure he or she doesn’t have too many complaints on file.

Me: You include building code officials as a part of your team?

Expert: Yes. You have to get their approval so it’s best to view them as team members rather than enemies. They have a job to do and it’s your job to make sure you and your contractor perform the work to specifications in the local building codes. Code officials have saved me several times. Don’t neglect them.

Me: What’s the biggest surprise people encounter when flipping for the first time?

Expert: Paperwork. The amount of paperwork associated with flipping a house blows most people’s mind. Of course the most important paperwork you’ll deal with is permits. That’s why you need to consider building officials as team members. It takes a LOT of time to get all the permits so make sure you apply for them before ANY work begins. The lack of the proper permits WILL cause work stoppages and this costs you money. Keep up with all contracts you sign and any receipts for materials or services. You’ll need these to know if you actually made anything. You also need to obtain insurance coverage not only on the property but the workers as well in the event they don’t have worker’s compensation insurance. Worker’s comp really should be a requirement you place on the contractor though.

Me: Well, our flight is about to end. I certainly appreciate you taking a few minutes to speak with me.

Expert: You’re welcome! I enjoyed our talk and I hope you have some information to share on your blog. Just remember: with any business venture, flippers, business people, and entrepreneurs should always expect the unexpected. You’ll always encounter something you simply did not anticipate. That’s why you need to make sure you’ve done your homework and checked it twice! Anticipate problems and respond to them (as opposed to reacting to them). There WILL be the inevitable bumps in the road when flipping a house. Just count on it. Things WILL go wrong. It is how you react to those things that count when flipping a house … especially your first one.

Ron, you can make a lot of money flipping houses … a lot of money. But it really isn’t something you can do well in your spare time. It’s hard to dabble in house flipping so if you’re going to do it, go all in.

~~~~~~~~~~~~~~~~

Some great information, huh? I really appreciate her approachability and willingness to share information with some guy on a plane! It was a fun talk and she had everyone around us straining to hear what was going on.

What do you think? Ready to flip that house?

Before you buy a home, you need to know your Credit Score. Click HERE to find out your credit score at no cost.

This article was included in the latest edition of the Carnival of Personal Finance hosted at Money Cactus.

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Once you’ve chosen a lender and a size and type of loan, the next step is to get prequalified or preapproved for your mortgage. Yes, all that comes BEFORE you find a home you’d like to buy. If you find the home first, you may not be able to afford it so make certain you know what you can and cannot afford before you let your emotions take over and get you into a loan that’s over your head financially.

What’s the difference between pre-qualified and pre-approved?

• Getting prequalified: To get prequalified, you provide your chosen lender with information about your income, assets, and debt. The mortgage lender then generates an estimate of what size mortgage you likely can get. Once you have an estimate, you’re prequalified for a loan. This isn’t what you need and it’s a a much less formal version of preapproval.
• Getting preapproved: To pre-approve you for a mortgage, your lender conducts a thorough analysis of your financials. You’ll probably need to provide pay stubs, tax returns, and copies of account statements. Some lenders charge a fee of about $50 in order to pre-approve you for a mortgage.

One vital aspect to getting either pre-qualified or pre-approved is knowing your credit scores, all three of them. Check out GoFreeCredit.com to get all three of your scores for free. That way, should you uncover anything unusual, you’ll be able to get it corrected before going through the hassle of providing financial information only to find you don’t qualify because of an errant credit score.

Prequalification and preapproval indicate that you’re likely to qualify for a mortgage of a particular type and size, but neither guarantees that you’ll be approved when you actually apply for a loan. Even so, it’s always helpful to get preapproved, not just prequalified, for a mortgage. Why? It all boils down to time. The sooner you can let a lender know you’re ready to get serious about a particular home and the sooner your mortgage lender has your financial information, the sooner you’ll be able to know if you can actually buy that home.

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Then find a home that you’d like to buy

Once you’ve been preapproved, you’re ready to begin shopping for a home. As you shop, remember that you’ve been preapproved for a mortgage of a certain size. That doesn’t mean you absolutely must find a home below that price, but choosing a significantly more expensive home will require you to start all over with your lender.

After you find a home, you’ll:

1. Make an initial offer to the seller: Your offer should be 10–15% below the total of the loan amount for which you’ve been preapproved plus the down payment that you expect to pay. That way you’ll still have wiggle room if the seller demands a higher price.
2. Negotiate a final deal with the seller: Once the seller receives your initial offer, he or she will likely make a somewhat higher counteroffer. You’ll then negotiate other terms of the deal, such as whether the seller will pay for repairs or upgrades to the property.
3. Sign a purchase agreement: A purchase agreement is a contract that formalizes the terms of the deal to which you and the seller have agreed. Usually the buyer’s real estate agent drafts the agreement.

Once you have a purchase agreement signed, the real estate agents and lenders will set a closing date. On the closing date, the sale of the property will close or finalize, and your lender will transfer funds to your seller and the keys to you!

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Okay, you’ve received an offer to buy your home (don’t forget to read the Do’s and Don’ts When You Receive An Offer). Maybe the offer to purchase is exactly what you hoped for, maybe it isn’t. Either way, when you receive an offer to buy your home, it’s time to calm down and evaluate it. Though it IS highly important, there is more to consider when you receive an offer than just price and there are more ways to respond to ANY offer to buy your home than just a simple yes or no.

What to consider when you receive an offer to buy your home

If you thought buying a home was a complicated process, get ready. Selling your home can be just as crazy, exciting, worrisome, thrilling, and maddening as buying it was.

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Consider the initial price the buyers offer

Though highly important, price isn’t the only factor you should consider. If you’re selling into a home-buyer’s market, you’ll probably have to accept a price that is below your asking price unless you have a premium home with every amenity possible.

In a home-seller’s market, you can feel more confident sticking to your asking price and waiting for a buyer who agrees to pay it. Keep in mind that accepting a lower price usually lets you remain firm on other terms that matter to you, such as the timing of the closing or other contingencies of the deal.

Consider your personal situation

How badly do you need to sell your home this week, or this month? Have you already moved? Do you HAVE to report for a job 4 states away in two weeks? Are you paying on two mortgages already? How long can you keep that up without tapping into your emergency fund? Your own personal situation is a HUGE factor to consider when you receive any offer to buy your home.

Consider the buyer’s personal financial situation

As a seller, you should always favor buyers who have been pre-approved (not just pre-qualified) for a mortgage that’s at least as large as the selling price minus the down payment that the buyer intends to pay. You should also favor buyers who intend to put down at least 20% as a down payment, though anything above 10% is usually acceptable for most banks and mortgage companies. Why is it important that the buyer have enough cash for a substantial down payment? The combination of preapproval and a significant down payment (in cash) makes it more likely that the buyer will be able to complete the deal and buy your home.

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How to respond to offers to buy your home

How you respond to an offer depends on the number of offers you have.

If you have a single offer to buy your home

You can accept or reject it outright, or make a counteroffer. Counteroffers are the most common seller response by far, especially in a weak housing market. No one wants to let anything even remotely reasonable slip away.

Your best bet is to make a formal, written counteroffer through your agent. In a typical counteroffer, the seller notes the terms of the buyer’s offer that he or she considers acceptable and strikes those that are unacceptable. Most counteroffers address both the price and any other terms of the deal such as the closing date or contingencies.

If you have multiple offers to buy your home (woo hoo!)

You should never negotiate with several buyers at the same time. It’s best to deal with the one buyer who offers the most appealing combination of price, terms, and financial stability. You might consider disclosing the terms of your best offer to all your bidders and set a deadline by which they can match or beat that offer. Bidding wars for your home are rare, but when they happen, you win!

The Purchase Agreement

Your and your potential buyer must agree on all the terms of the deal before you can consider it final. Once you have agreed on all the terms, one of your agents—usually the buyer’s agent—will prepare a formal purchase agreement that includes all the terms of the offer. Most states have (and require you to use) a boilerplate purchase agreement. In other states, a formal offer signed by both parties is sufficient. Any changes to the agreement that result from inspections or other issues should be documented in a written addendum to the agreement, signed by both parties.

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Pricing a home correctly is quite possibly the most important step a home seller can take for a quick sale at a satisfactory price. Unlike other types of assets, a home doesn’t have a fixed value. In reality, a home’s value is defined by constantly and rapidly changing conditions, such as the health of the local real estate market, interest rate trends, buyer’s preferences and local crime rates.

I once spoke with a real estate agent who told me that price was the only thing that kept her from being able to sell a piece of property. When I challenged her assertion, she replied with, “Honey, I could sell the Chernobyl Nuclear Plant if it was priced at $100!” Touché.

What is fair market value

The fair market value (FMV) of a home is the price that the market determines the home is worth at the time of listing. The listing price and the ultimate selling price may not be the same but the FMV is the price a buyer is willing to pay and a seller is willing to accept. FMV is not your original selling price from a few years ago plus the percentage the average home has increased in value!

The most effective way to price a home for a quick sale that satisfies the buyer and seller is to assess and approximate the home’s FMV and make that value the asking price. If those two numbers (the buyer’s and the seller’s) are far apart, someone isn’t being reasonable.

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How to find your home’s fair market value

The most effective way to decide your home’s FMV is to perform a comparative market analysis (CMA) – a side-by-side comparison of the prices and features of your home compared to homes recently sold or for sale within a 2 – 5 mile radius. In most cases, the CMA you get from your agent consists of two sets of data:

Comparable homes currently on the market in your area

You or your agent should compile a list of homes (and their prices) that have been listed within the past 3–6 months and are still on the market.

Comparable homes that have sold recently in your area

This includes homes that have been sold within the past 6 – 12 months, though agents sometimes include data from as far back as two years.

Your agent should compile these two lists for you and discuss your home’s fair market value as well as your listing price. Make sure your agent’s CMA includes specific details about each property, such as its asking or selling price, location, square footage, lot size, school zone, number of bathrooms and bedrooms, special amenities (stone fireplace, basement, garage, deck, pool), and the price per square foot.

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Other sources for finding your home’s FMV

A thorough CMA from your agent should provide enough information to determine your home’s FMV. However, if you want even more data before setting an asking price, consider:

Independent appraisal

You can hire a professional independent appraiser to give you an unbiased estimate of your home’s FMV. Appraisals usually cost $250–500 and take several hours.

Open houses

You can attend open houses in your area to see for yourself how properties similar to yours compare, inside and out. Many home sellers find it difficult to be 100 percent objective, however, and emotions can rule the day.

Online sources

Several websites provide free, instant estimates of FMV based on data such as the home’s location and selling price history. One such site is ElectronicAppraiser.com.

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How to set the right price for your home

Your asking price should not necessarily be exactly equal to your FMV. Instead, use your FMV as a starting point, adjusting your asking price up or down based on:

• Your urgency – If you must move as soon as possible, you might consider lowering your asking price 5 – 15% below your home’s FMV. The lower price will likely attract more buyers and speed the sale.
• Local inventory –Your agent should be able to provide you with historical data on the inventory of unsold homes in your area. If the current numbers point to a glut in the marketplace and, therefore, a buyer’s market, it’s probably a good idea to set your asking price 10–15% below the FMV to attract bargain hunters.

If you’re operating in a seller’s market, you can more easily set your home’s listing price above the FMV. If you’re not in a strong seller’s market however, pricing your home above the FMV will more often result in frustration on the part of the seller and the listing agent. Remember that most buyers work with agents and those agents have access to the same FMV data that you and your agent have. As a result, buyers and their agents can easily spot overpriced homes immediately and usually ignore overpriced listings.

Frustrated sellers respond by gradually ratcheting their prices down to align with the FMV, but in that time, new listings pop up that overshadow the languishing mispriced listings. To make matters worse, sellers who misprice their homes lose negotiating power to buyers who know how long the home has been sitting on the market. In short, it’s best not to set your asking price more than 5 percent above your home’s FMV.

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It all boils down to the negotiations. As discussed in Secrets of Power Negotiating, (read my review of the book) the best negotiations end with both sides believing that they got the best deal for themselves. When selling your home, your personal negotiation strategy should examine and carefully consider factors such as the condition of the real estate market and your own eagerness to sell when you start receiving offers to buy your home. An eager seller equals a lower price! If you’re eager to sell, NEVER communicate that … even to your own real estate agent.

While any parent knows that negotiation skills come naturally to children, those abilities seem to wane as children age. Many never remember how to haggle or negotiate to get the best deal for themselves again. I’d recommend reading Dawson’s book (see link above) and using these do’s and don’ts when faced with a real estate negotiation.

Real estate negotiation do’s and don’ts

Do stay with the facts

The facts of the deal — the condition of your home, the condition of the market, your need to sell, the buyer’s finances — should guide your negotiations … and your expectations.

Do use your agent

It’s usually best to avoid speaking with the buyer or his or her agent directly. Communicate your wishes very candidly to your agent so he or she can accurately represent your interests. Your agent should handle the direct negotiations, not you. By using your agent, you can more freely speak your mind and much more easily express your emotions and frustrations without the risk of damaging the negotiations.

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Do give in … but not too soon

There’s nothing wrong with thinking an offer over for a day or so. Plus, by holding a hard line early, you can make it seem as if you care about certain terms that you really don’t. Then you can let the buyer have his or her way on those terms in exchange for other concessions that you really do care about.

Do go halfway … sort of

If there’s a number or date that you and the buyer can’t agree on, ask if the buyer is willing to go halfway. Then counter offer to go half of that. For example, if you’re asking $300,000 for your home and the buyer wants to pay $260,000, ask if the buyer would be willing to go halfway — $280,000. If his agent indicates to your agent that this is a possibility, announce that you’re willing to split his $280,000 and your $300,000 and concede down to $290,000.

Do focus on resolvable issues

Always ask a buyer to “set aside” the big issues that are plaguing the process and get him or her to agree with you on some common ground. If you focus on what you can solve rather than what you can’t, you can build up momentum and goodwill and make big issues seem smaller.

Do get everything in writing

Never consider any “oral agreement” as anything you can bank on, even if it comes from your agent. Insist on a written record, signed by both parties, of all counteroffers and revisions. Ask for signatures with dates, not just initials.

Don’t communicate your eagerness to sell

Nothing will get you a lower price more quickly than announcing that you’ve already taken another job in another state and have another mortgage to pay while trying to sell THIS house. Even if all those things are true, you don’t have to tell everything you know about your personal situation.

Don’t give in without getting a concession from the buyer

One of the biggest mistakes negotiators make is agreeing to a concession without getting anything in return. If the buyer simply WILL NOT come up another $1,500 in price, demand that the closing take place before you have to make another house payment. If he demands that you leave all appliances and window treatments, agree only if he comes up another $5,000 in price. If she demands that the carpet be replaced, demand that YOU get to pick them out unless the selling price is raised. If he demands that you paint the exterior, agree only if he pays all closing costs.

Don’t get stuck on minor issues

If you have an offer that really turns your head, don’t jeopardize it by focusing on terms such as whether you get to keep your Aunt Jenny’s handmade curtains that hang over your kitchen sink. People will get hung up on the silliest of things when there’s hundreds of thousands of dollars at stake. Real estate agents can tell you some really funny stories about how a $500,000 deal fell through because someone wouldn’t part with a $900 refrigerator.

Don’t be afraid of an offer with contingencies

Some sellers won’t accept an offer with contingencies attached that include getting “acceptable” mortgage financing or the sale of the buyer’s current home. Consider these conditions of the deal if they’re reasonable for the situation.

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Don’t dismiss any offers out of hand

Read and consider all offers before rejecting them and carefully consider whether you should reject ANY offer outright. Sellers often cringe at their first offer, though studies have shown that the first offer is often the best — unless the home has been on the market for only a few days in a seller’s market.

Don’t be afraid to walk away

This is your MOST powerful weapon. Agree with a deal only if it feels fair to you. If your buyer or the terms of the deal feel in any way unsatisfactory to you, you can call it off. You’re in control … it’s your house until you sell it!

Negotiation isn’t JUST about price

Don’t fall into the trap that all negotiations are only about price. That’s the major factor to be sure but there are other factors you can throw in there such as:

1. The timing of the closing
2. Who pays which closing costs
   • attorney’s fees
   • title insurance
   • real estate agent’s and broker’s fees
   • inspections
3. Items you could accept with a lower cash offer – use of a vacation home, a boat, an RV, etc.

Everything is open for negotiation. The key is to know what you want out of the deal, but more importantly, know what your buyer wants. When you know what your buyer wants (his or her hot buttons), you’re in the driver’s seat.

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